This is the companion blog to the MyGovSpending.com website.





Monday, October 10, 2011

PUBLIC SECTOR EXPECTS TO TANK UP ON SQUEEZED FAMILIES Off-Off Election Year Tax Increases - The Path of Least Resistance

(I've submitted the following editorial to one of my local newspapers, The Vail Daily. The basic points have broad application wherever you pay taxes)

State and local tax authorities are asking voters to raise taxes again. They have presented it as a nickel and dime proposal.

Those nickels and dimes will be spread over time. When valued today, they total $11,600[i] per Eagle County household. 

Broken apart, the local school district wants $9,400; the local fire district wants $700,  State Senator Rollie Heath of Boulder wants another $1,500, also for the public K-12 industry[ii]

Should Mr. Heath's five year tax hike become a permanent tax increase, the present value cost of the three ballot measures balloons to $43,000 per household[iii]. That's big money for ordinary families.

These measures have some 'hidden charges', too. At the Colorado Public Employees Retirement Association (PERA), fast and loose benefit increases during good times are now coupled with losses from aggressive investing during bad times. That devilish duo opened a pension shortfall of $12,026 per taxpayer family[iv].

PERA is trying to make up its losses by shooting out the lights in the stock market.  If it fails, taxpayers are ultimately on the hook for the missing money.  

Local bureaucracies have made big money mistakes right here at home, too. Taxpayers now have expensive, excess boom-era buildings to pay for. Public sector folks are often terrific people, but management practices seem intentionally designed to suppress employee initiative and productivity.  Low productivity is expensive.

Then there is the power imbalance between rulers and ruled. Taxing authorities have zero tolerance for people who do not perform up to their expectations. Any doubt? Divert some of your taxes to a better cause and see the reaction.

On the other hand, if a taxing authority does not fulfill a taxpayer's reasonable cost and quality expectations, that individual citizen has no effective recourse. None.

And, of course, taxing authorities have great power to influence elections. They can call votes in off-off years - like 2011 - when turnout is expected to be low. A small but fired-up group of tax recipients can easily swamp the broader, more diffuse general interest. 

Local governments also have the big budgets, consultants, salaried leadership, paid staff, employee leverage to push for ever more money. The lonely taxpayer, however, is on her own.

Given this unbalanced relationship, it is not surprising that government spending has grown much faster than the rest of the economy for generations. Public expenditures have increased from 10% of GDP to 38% over the last century[v] - through a continual stream of "small" tax increases driven by politically opportunistic special interests.

A typical family earning $75,000 of cash income annually will pay approximately $1.3 million in taxes over its working career[vi]

Beyond that $1.3 million tax load, Washington, state and local governments have piled on another $100,000[vii] of national debt per $75,000 income family.

There's more. The same gang mentioned above has run up an additional $70,000 in unfunded government employee pension liabilities[viii]

Brace yourself for the big hit. Washington has "arranged" that each family and their descendants will pay $600,000 (today's value) in benefits for Social Security and Medicare[ix].  

It all tallies up to $770,000 in unfunded public liabilities per family. Oooph!  Richer families are on the hook for more, poorer families for less[x].

Throw in the demographics of aging and it is easy to build a muscular case that financial pressure is only starting to build...both globally and in Eagle County.

No wonder growing numbers of taxpayers feel like they are locked in a careening car with a drunk driver. 

Regardless of the outcome in November, taxing authorities are likely to face ever more scrutiny from increasingly sophisticated, value seeking taxpayers.  

Rising demands for lower costs, higher quality and more individual self-determination will certainly stress these traditional public institutions. Their most determined defenses are unlikely protect them from reform forever.  

The days when bureaucrats can expand their share of society's wallet simply by saying "trust us" are rapidly drawing to a close.  That's been tried and found wanting.


[i] The cost of tax increases are often presented as one annual payment.  Unless there actually is only one annual payment, the cost is more.  Financial analysts calculate how much that stream of payments is worth today assuming one can earn a return on money invested today. 
            Evaluating a tax increase based on one annual payment is analagous to buying a car knowing only what one monthly payment would be.  It is also important to know the price of the car. The Present Value (today's value) of the tax is the price of the tax, like the price of purchasing a car.
            Note: only humans with heartbeats pay taxes. The fact that businesses are taxed at higher rates does not reduce individuals' tax burden. Individual citizens pay taxes on businesses in addition to those levied specifically on individuals, too, through reduced compensation for employees, higher prices for customers, and lower profits and higher risk for business owners.
            To the extent businesses compete out-of-county those businesses become less competitive as relative taxes increase, shifting jobs to more efficient tax jurisdictions.
[ii] Eagle County School District, Eagle County Colorado Ballot Issue 3B, is a permanent tax increase, that does not increase with inflation. 
            The Eagle River Fire Protection District, Eagle County Colorado Ballot Issue 5A, proposed tax increase is for seven years and not capped at a fixed dollar amount. The author valued this income stream as one that increases with inflation. 
            Colorado Ballot Proposition 103, the Rollie Heath Tax, is a five year tax increase with no fixed dollar cap.  The author valued this income stream as one that increases with inflation. 
[iii] If the Rollie Heath tax becomes permanent, its cost to taxpayers jumps far beyond the five-year edition of this tax, largely because the tax is assumed to increase with inflation. For present value purposes, long-term inflation-protected Treasury bonds are assumed to be used to fund the tax liability.  They currently are generating record lows yields, requiring a large initial investment to fund the tax, hence the greater value (or cost) of the tax today.

[iv] Colorado PERA shortfall is as of 31 Dec 2010 from  Colorado PERA Summary Annual Financial Report for the fiscal year ended December 31, 2010, page 4. The number of Colorado households is calculated as Colorado 2010 population from http://quickfacts.census.gov/qfd/states/08000.html accessed during the week of 25 October2011 divided by 2.7, an estimate of population per household.
[v] Calculated from US Bureau of Economic Analysis data,  NIPA tables 1.1, 3.1, 3.2, 3.3.
[vi] MyGovSpending.com estimates. Based on economic income, not cash income.
[vii] Federal data from BEA NIPA data.  State and local data from the Census Bureau.  Per household calculations from MyGovSpending.com.
[viii] Federal data from US Treasury, 2010 US Government Financial Report, pg xi, state and local data from Pew Center for the States, The Trillion Dollar Gap. Income adjusted per family calculations by MyGovSpending.com.
[ix] Present value of Medicare and Social Security shortfall from US Treasury, 2010 US Government Financial Report, pg 172, Table 6, Update from 2010 to 2011 and per family disaggregation calculations by MyGovSpending.com.

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